9
Possible Scenarios for U.S.-Japan Alliances and Their Implications for the United States

How will the trends described in Chapter 8 and other broad forces interact in the future to influence the competitive position of the U.S. semiconductor industry? How do U.S.-Japan alliances affect American semiconductor competitiveness? Do they strengthen or weaken U.S. industry? This chapter sketches several possible scenarios for the U.S. semiconductor industry, and considers factors that will determine its performance in world markets.

SCENARIO 1: GRADUAL U.S. RECOVERY

Currently, the U.S. semiconductor industry has about a 39 percent share of the worldwide market. In this optimistic scenario, the U.S. industry gradually regains a market share, rising above 40 percent share to a 45–50 percent global share. A number of conditions that would contribute to this scenario are listed in Table 8.

How plausible is this scenario? There is strong evidence that five of its conditions (items 1, 2, 3, 7, and 8 in Table 8) already exist. However, the record of U.S. semiconductor manufacturing competitiveness is mixed. Although some large corporations are making new investments and improving their processes, many smaller or older companies are reducing their plant capacity. Moreover, an increase in venture capital and long-term corporate investments appears doubtful, and although access to Japanese and Asian markets may be improving slowly, it is still marked by ''buy local" practices



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U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer, Competition, and Public Policy 9 Possible Scenarios for U.S.-Japan Alliances and Their Implications for the United States How will the trends described in Chapter 8 and other broad forces interact in the future to influence the competitive position of the U.S. semiconductor industry? How do U.S.-Japan alliances affect American semiconductor competitiveness? Do they strengthen or weaken U.S. industry? This chapter sketches several possible scenarios for the U.S. semiconductor industry, and considers factors that will determine its performance in world markets. SCENARIO 1: GRADUAL U.S. RECOVERY Currently, the U.S. semiconductor industry has about a 39 percent share of the worldwide market. In this optimistic scenario, the U.S. industry gradually regains a market share, rising above 40 percent share to a 45–50 percent global share. A number of conditions that would contribute to this scenario are listed in Table 8. How plausible is this scenario? There is strong evidence that five of its conditions (items 1, 2, 3, 7, and 8 in Table 8) already exist. However, the record of U.S. semiconductor manufacturing competitiveness is mixed. Although some large corporations are making new investments and improving their processes, many smaller or older companies are reducing their plant capacity. Moreover, an increase in venture capital and long-term corporate investments appears doubtful, and although access to Japanese and Asian markets may be improving slowly, it is still marked by ''buy local" practices

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U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer, Competition, and Public Policy TABLE 8 Conditions Conducive to Realizing Scenario 1 Factor Condition 1. Exchange rates Declining dollar 2. Cost of capital Lower interest rates 3. Manufacturing Increased manufacturing investment and U.S. industry productivity 4. Investment environment Increased venture capital and long-term corporate investments 5. Asian markets Better access to Japanese and Asian markets 6. U.S. marketing efforts Massive global marketing effort by U.S. companies 7. Design intensity Design-intensive technologies increase in value 8. Standards Success of emerging global standards (ACE, SPARC, etc.) and structural barriers. If the conditions described improve, U.S. companies will be under less pressure to enter alliances and would have more alternatives. American-Japanese alliances will be aimed at securing long-term financing, increased access to the large Japanese market, and manufacturing capacity. Large U.S. companies would be hesitant about foregoing future opportunities, whereas small "boutique" houses would become more attractive to Japanese investors. Although alliances could help facilitate a gradual U.S. recovery, they would not serve as the main driving force. Alliances are a supplement to, not a substitute for, healthy fundamentals in the private and public sectors. SCENARIO 2: MARKET SHARE EQUILIBRIUM In the second scenario (status quo), U.S. worldwide semiconductor market share would hover between 35 and 40 percent, which is where it is today. Maintaining a status quo, however, would require more U.S. effort to counterbalance a greater mobilization of resources in Japan and Asia. Rising Japanese R&D and plant investments probably would not forestall growing Asian strength in DRAMs and other commodity markets, whereas U.S. companies might be able to forestall shrinkage in market share by introducing new products faster. The key factors leading to an equilibrium scenario are listed in Table 9. In this "business-as-usual" scenario, the number of U.S.-Japan alliances would continue to form at current rates and would fluctuate with business and product cycles. There would be no pressing external reason for U.S. companies to enter alliances—beyond those already at work—and no major new pressures on Japanese companies to help U.S. companies. However, the number of U.S.-Asian alliances might increase in response to emerging

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U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer, Competition, and Public Policy TABLE 9 Conditions Conducive to Realizing Scenario 2 Factor Condition 1. Exchange rates Stable dollar 2. Cost of capital Stable interest rates 3. Manufacturing Increased manufacturing investments and U.S. industry productivity 4. Investment environment Stable venture capital and long-term corporate investments 5. Asian markets Better access to Japanese and Asian markets 6. U.S. marketing efforts Increased global marketing efforts by U.S. companies 7. Design intensity Design-intensive technologies increase in value 8. Standards Success of emerging global standards (ACE, SPARC, etc.) 9. Asian alliances Use of Asian fabs expands U.S. market share opportunities for greater cooperation in Asia, triggering defensive moves by Japanese makers to contain or counteract these rival alliances. SCENARIO 3: GRADUAL U.S. DECLINE Under the third scenario, the U.S. semiconductor industry would lose a small but significant portion of worldwide market share with each passing year—1 to 2 percent, for example—which may seem small for any given year but adds up to an appreciable reduction over 10 years. This would mean that America's market share would be whittled down from 39 percent to 20–25 percent by the year 2000. If this scenario were to occur, it would result from the factors listed in Table 10. TABLE 10 Conditions Conducive to Realizing Scenario 3 Factor Condition 1. Exchange rates Stronger dollar 2. Cost of capital Rising interest rates 3. Manufacturing Inadequate manufacturing investment by U.S. companies 4. Investment environment Reduced venture capital and corporate investments 5. Asian markets Opportunity costs in Japanese and Asian markets 6. U.S. marketing efforts Declining global marketing efforts by U.S. companies 7. Design intensity Variability in value of design-intensive technologies 8. Standards Japanese successfully adapt to emerging global standards (ACE. SPARC, etc.) 9. Asian alliances Asian fab alliances falter

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U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer, Competition, and Public Policy If conditions worsen as outlined, U.S. companies would feel stronger pressures to seek new Japanese ties, especially in joint R&D, manufacturing, and distribution. The erosion of America's market position would not affect U.S. companies uniformly; the impact would be most severely felt by slower-reacting companies. Opportunities would be ripe for Japanese investors to make significant investments and inroads into emerging U.S. semiconductor companies. A great deal of U.S. R&D would move offshore to Japan, Europe, and Asia in order for U.S. firms to remain competitive in regional markets. SCENARIO 4: JAPANESE DOMINANCE Under a somewhat worse scenario, the U.S. semiconductor industry would lose 2 to 3 percent of the global market share each year to Japan, leading to a U.S. share of only 10–15 percent in the year 2000. In looking at the underlying factors described above, this sharper decline would result from the same forces at work in the third scenario in worse form (see Table 11). If this scenario were to come to pass, U.S. companies would have no choice but to enter into alliances with Japanese companies in order to secure manufacturing, design, market access, and global marketing and distribution channels. Alliance formation, in this sense, would emerge from weakness, not from strategic calculations. American firms would find themselves at a distinct disadvantage in negotiating with Japanese partners over the conditions of cooperation. Thus, such alliances would be likely to accelerate technology outflows. Even if Japanese firms returned state-of-the-art TABLE 11 Conditions Conducive to Realizing Scenario 4 Factor Condition 1. Exchange rates Strong dollar 2. Cost of capital Rising interest rates 3. Manufacturing Declining manufacturing investments and lower U.S. productivity 4. Investment environment Declining venture capital and corporate investments 5. Asian markets Poor access to Japanese and Asian markets 6. U.S. marketing efforts Ineffectual global marketing efforts by U.S. companies 7. Design intensity Design-intensive technologies lost through alliances 8. Standards Japanese successfully adapt to emerging global standards (ACE, SPARC, etc.) 9. Asian alliances Use of Japanese and Asian fabs accelerates "leakage"

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U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer, Competition, and Public Policy technology, U.S. industry might find itself in too weak a position to take advantage of this reverse technology flow. SCENARIO 5: PACIFIC RIM DOMINANCE In the last, worst-case scenario, Japanese and Asian companies would account for 70–80 percent of the world market share. American and European producers would be relegated to minority status, with only 15 and 5 percent market share, respectively. Again, in terms of the underlying factors discussed above, the conditions for their demise would include those listed in Table 12. If this "doomsday" scenario were to materialize, U.S.-Japan alliances would have little strategic relevance, and they would not arrest the slide in U.S. competitiveness. Japanese executives would consider alliances short-term, political fixes designed to keep U.S. companies afloat financially and to minimize the inevitable fallout of anti-Japanese resentment that would ensue. The United States would be relegated to serving as merely an R&D laboratory for Asia and Japan, with little or no infrastructure for mass manufacturing. By selling raw ideas to Japanese and Asian companies, which are then able to capture the most value added from manufacturing and marketing, the United States would become in effect, a satellite participant, lacking the full range of competence in research and development, production, and marketing to be a full-time player. America would be turned into a "banana republic" in the world of high technology (see Figure 16). There TABLE 12 Conditions Conducive to Realizing Scenario 5 Factor Condition 1. Exchange rates Grossly overvalued dollar 2. Cost of capital Very high (15–20%) interest rates 3. Manufacturing Meager manufacturing investments and sharp U.S. productivity setbacks 4. Investment environment Marked falloff of venture capital and corporate investments 5. Asian markets Diminished access to Japanese and Asian markets 6. U.S. marketing efforts Woeful global marketing efforts by U.S. companies 7. Design intensity Design-intensive technologies lost through alliances 8. Standards Japan and Asia leverage global standards (ACE, SPARC, etc.) 9. Asian alliances Use of Japanese and Asian fabs accelerates technology "leakage" and loss of U.S. comparative advantage in product development and standard setting

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U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer, Competition, and Public Policy FIGURE 16 The high-tech banana republic. Source: William Howard. would be a massive loss of jobs, a traumatic "shake out" of the semiconductor industry's fragmented but dynamic structure, and an upheaval in the delicate ecosystem currently in place for the training of highly skilled, technical manpower. American engineers laid off at large semiconductor houses would have to find work at start-up "boutique" houses without fabrication facilities (financed largely by Japanese companies) or at local Japanese subsidiaries; many would find themselves out of work. Which of the five scenarios outlined above will occur? Although accurate forecasting of the future is impossible, it appears that the U.S. semiconductor industry today stands closest to the second scenario, an equilibrium model. Whether American companies can continue to forestall structural decline following the current recession is open to doubt. Large U.S. semiconductor companies are laying off engineers and being out-invested by their Japanese competitors, which suggests the inevitability of future market

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U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer, Competition, and Public Policy share erosion unless the fundamentals of the situation can be turned around. Moreover, the entry of Japanese RISC microprocessor manufacturers and the shift to ''multimedia" computing and other memory-intensive systems will enhance the market strengths of Japanese chip makers who will compete with other Asian makers for global market share. However, the implications of the shift from logic to memory intensiveness are not as yet entirely clear. New assessments in early 1992 of a U.S. semiconductor industry resurgence were tempered by questions as to whether the real trend was toward "stalemate," or "stabilization" with neither Japanese nor American producers gaining much ground. 37 In sum, unless fundamental changes are made in the way business is done, the U.S. semiconductor industry seems likely to be headed for either Scenario 2 or perhaps the slippery slope of gradual decline outlined in Scenario 3. Of the two, Japanese companies probably would prefer to see Scenario 2 materialize; a continuation of the status quo would be less likely to aggravate potentially volatile trade tensions. To maintain the status quo, however, U.S. companies will have to pay greater attention to their competitive fundamentals, including the retention of a viable manufacturing infrastructure at home. Japanese corporations will have to do more than they have in the past to ensure a full reverse flow of technology, better access to Japanese markets, and a clearer commitment to reciprocity. 37   See Andrew Pollack, "U.S. Chip Makers Stem the Tide in Trade Battles with Japanese," New York Times, April 9, 1992.